Sino-Indian economic ties are on a growth curve raising hopes that such ties would have a salutary effect on bilateral relations. While the border remained tense last year, our trade ties, as noticed from the recently concluded Joint Economic Group (JEG) meeting, are also showing signs of strain. For those who perceive this to be alarmist might consider the disputes that the United States’ (US) trade deficit with Japan created in the 1980s. Trade frictions were exacerbated by the low value of the Yen, closed markets and restrictive trade policies that the US accused Japan of pursuing. Today, one can substitute India for the US and China for Japan as far as economic issues are concerned. The crucial difference is that while Japan and the US were bonded in an alliance, Sino-Indian relations are going through a rough patch. Unless immediate remedial measures are taken to ease trade disputes, they will put added pressure on the fragile relationship.  

At the 8th round of the JEG meeting, India issued a ‘demarche’ to China to initiate steps to bridge the trade gap. Although China agreed to address India’s concerns, no concrete market access plans have been announced till date. If the frequency of such meetings is an indicator of their potential to address trade issues, it would amaze one to know that the sixth and seventh rounds of JEG meetings were held in 2000 and 2006 respectively. At the seventh round of the JEG meeting too, China had made similar market access commitments which unfortunately failed to see the light of day.
From having a positive balance of trade early this decade, India’s trade deficit with China has increased substantially and is above US$20 billion currently. India’s exports to China dipped by 14 per cent in 2008-09 whereas our imports increased by 20 per cent when compared to 2007-08. Three-fifths of India’s exports to China consist of ores, minerals, primary and semi-finished iron and steel. China, on the other hand, exports products such as electrical machinery, equipment, electronics and organic chemicals. China’s structure of exports is moving towards high-end, value added products, whereas the pattern of India’s exports has more or less remained unchanged. While China overtook the US to emerge as India’s largest trading partner, India’s exports to China as a percentage of its total exports have hovered at around 8 per cent.

Although it is fashionable to compare India and China, there is a huge difference in the size of the economies. China, with exports of US$1.2 trillion, has overtaken Germany as the world’s largest exporter and is awaiting the official announcement of Japanese GDP figures in February before being formally declared as the world’s second largest economy. In contrast, India’s total merchandise trade in 2008-09 was less than US$400 billion.

The adverse balance of trade compelled India to issue the demarche, an instrument that India has used sparingly in its economic diplomacy. Given India’s high revealed comparative advantage (RCA) in the agricultural sector, the demarche asked for faster market access for fruits, vegetables and basmati rice. High tariffs and non-tariff barriers like custom procedures and certifications, subsidized inputs and capital, the artificially pegged Yuan and a host of other aspects unrelated to economic factors of production have restricted India’s market access. India has asked China to eliminate these barriers and to remove local content stipulations, encourage Chinese state owned enterprises (SoEs) to import Indian value added products, recognize international intellectual property right registration regimes and follow the Japanese example in easing norms for pharmaceutical imports.

In the export promotion package announced in January this year, India included China in the Market Linked Focus Product Scheme. India now expects China to undertake remedial measures to facilitate export of Indian goods to mitigate, if not eliminate, the adverse balance of trade. China needs to know that addressing India’s concerns might generate the goodwill required to overcome opposition within India for an economic partnership agreement (EPA). Fair play on China’s part might increase business confidence in India with regard to China. It might also facilitate China’s long standing demand for market economy status (MES) and curb trade defence measures such as anti-dumping duties imposed on Chinese exports. India, in turn, agreed to allow entry of more Chinese professionals engaged in infrastructural sectors thereby addressing one of their immediate concerns.

India has negotiated or is negotiating EPAs with all members of the proposed East Asian Free Trade Agreement (EAFTA) barring China. To entrench Chinese support for India’s participation in East Asian regionalism process, sooner or later, India has to extend reciprocal concessions to China under an EPA. Experiences from the Asia-Pacific Trading Agreement (APTA) to which both are contracting parties could be beneficial. India needs to extract the maximum out of the services and investments negotiations to reduce losses that might arise due to tariff concessions extended in the trade in goods (TIG) component of the proposed EPA. Two centuries earlier, ‘Chindia’ accounted for 48 per cent of global GDP. As per latest IMF projections China and India will register 10 per cent and 7.7 per cent growth this year respectively, hence the need to overcome trade frictions and talk business is in mutual interest.